Severance pay, or a severance package, refers to the compensation and benefits a company gives employees when employment is terminated. Although this is usually given in the event of layoffs, there are a number of other causes which could warrant this provision.

Severance pay may include compensation determined by the length of employment in a company, vacation and sick leave conversion, compensation for the absence of prior notice, stock options, insurance, and other forms of assistance.

Severance contracts provide the necessary provisions that govern the arrangement between the employer and employee. One of the most important elements is the employee’s agreement to abstain from pursuing legal action against the employer. Should the employee be found to be in violation of any of the stipulations, the severance money must be returned.

There are several factors that come into play when determining severance pay. For one, higher-level employees can expect higher compensation. Also, this can depend on whether the company has included a provision for such in the employee contract.

Severance pay is, however, just an option for companies. They are not strictly required to provide this, especially when the cause for termination is poor performance. Layoffs usually include some form of severance compensation. For regular employees, this is known as a tin parachute, whereas for higher-level executives, it is referred to as a golden parachute.